Bitcoin 101: Know all about it

It’s all over the news again! Elon Musk, after teasing the Twitter community for over a week since he changed his bio to just ‘Bitcoin’, revealed that Tesla has added $1.5 billion worth of bitcoin to its balance sheet. Naturally, crypto Twitter went crazy. The bitcoin bulls finally felt vindicated that the richest man in the world was officially in their corner and the world’s largest cryptocurrency has jumped over 15% since. In fact , the value of a bitcoin has more than quadrupled since September 2020.

The legality around cryptocurrencies in India isn’t yet clear. In March 2020, the Supreme Court overturned an RBI ban on cryptocurrency trading. Since then, the activity and volume traded on crypto exchanges in India has grown exponentially. At the time of writing this, the Indian Parliament is yet to table a bill that will decide on the future of cryptocurrencies, leaving this ecosystem in India on edge.

While this new-age gold rush (bitcoin is often referred to as ‘digital gold’ because of its fixed supply), has just about caught the attention of mainstream media, much of the world is left scratching its head on what exactly this new asset class entails.

There is more to cryptocurrencies than just bitcoin. A parallel universe is being built around Ethereum (with Ether as its currency) as well, with hundreds and thousands of decentralised finance (DeFi) projects being built on its blockchain. Delving deep into each aspect of cryptocurrencies is beyond the scope of this article. Hence, for now we will just begin with offering a practical ‘Bitcoin 101’ lesson to help the average investor get familiarised with this ecosystem.

What is bitcoin?

On October 31, 2008, just around the time the world was reeling from the effects of the global financial crisis that sounded the death knell for large banks such as Bear Stearns and Lehmann Brothers, a pseudonymous person by the name of Satoshi Nakamoto released a white paper talking about a new type of payment and settlement system—a decentralised electronic form of cash called bitcoin facilitated by a trustless peer to peer network called a Bitcoin blockchain. The supply of this new currency would be hard capped at 21 million coins and it would have to be mined (read minted) by solving a complex algorithm.

Until then, money as we knew it was routed through a centralised intermediary like a bank. This is largely how money is transmitted today as well. Let’s say you have to send $100 to a friend. In simplified terms, it is routed through your bank where it debits your account and credits his/her account. If there is a technical issue with your bank (for example system down/maintenance), your transaction would be delayed, or nullified. Or in a worst-case scenario, if there is a security breach, your account could be hacked, and this results in your bank becoming a single point of failure.

Alternately, you could send your friend bitcoin worth $100, without routing it through a bank. Your ‘bank’ here would be a network of thousands of computers called nodes, spread across the world on a Bitcoin blockchain (a public transaction ledger), that would confirm and validate your transaction. Hence there would be no single point of failure.

An important point to note here is that the blockchain is called Bitcoin (with an uppercase ‘B’) and its currency is also called bitcoin (albeit with a lowercase ‘b’) and the smallest unit of a bitcoin is known as a satoshi (like a paisa is to a rupee or a cent is to a dollar).

While offering an alternate payment mechanism and currency outside the banking system was the original intent behind bitcoin, it is currently increasingly being used as a store of value, rather than a medium of exchange. This is because the technology is still fairly new and clunky, with each transaction taking about 10 minutes to get confirmed, and fees making it impractical. It’s a lot easier and faster to just swipe your credit card at a coffee shop and pay a fraction as commission fees as compared to paying with bitcoin.

Another reason that has accelerated its adoption as a store of value is its deflationary nature (fixed supply of 21 million bitcoins creating an increased demand) amidst unlimited currency printing by central banks around the world, especially in this past year because of the impact of Covid-19 on global economies. Bitcoin maximalists are dead sure that eventually bitcoin will replace the U.S. dollar as the global reserve currency because of the expansionary monetary policies of the Federal Reserve.

Additionally, this asset class has caught the fancy of institutional investors in the U.S. Michael Saylor of MicroStrategy Inc. has close to $1.3 billion in bitcoin on his company’s balance sheet, while Jack Dorsey, CEO of Twitter and Square, has parked $50 million of Square’s free cash flow in bitcoin. Hedge fund managers such as Paul Tudor Jones II (Tudor Investment Corporation) and Ray Dalio (Bridgewater Associates) have also finally come around to accepting this technology that has not just survived, but thrived since its inception over 12 years ago.

Whether Elon Musk, arguably the most visible personality from the business world to endorse bitcoin, can sway policymakers in India is, however, yet to be seen.

Views are personal. The author is an entrepreneur, travel show host, and a crypto enthusiast. He can be reached on Twitter @rahuljagtiani and Instagram @rahul.jagtiani.